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INVESTMENT TRUST

Split Level Trust

(Also called Split Capital Trust, Dual Purpose Trust)

Lump sum invested in a company which employs professionals to invest its assets in shares. Unlike ordinary Investment Trust Shares the shares of a Split Level Investment Trust are (usually) split into two or more types, the main ones being income shares and capital shares.

Income shares receive all the income from the trust all of which is paid out as dividends; capital shares receive no income. Split level trusts usually have a fixed life, like a Stock, at the end of which after 1 to 9 yrs, depending on the trust.

The income shares are repaid at the price at which the shares were first issued provided that the underlying assets have risen by a specified growth rate over the life of the trust. That does not mean they are safer than capital shares. In the Investors Chronicle, 3 December 1999, an example of such an income share of a split level trust was given: the shares had a yield of 9% and the trust's investments needed to grow by 5.5% a year over the next 6 years for investors to have their original investment returned. However if the trust's investment show no growth, then the Income Shares will lose 84% of their capital value the magazine said.

Capital shareholders get the value of the investments in the company. The capital shares tend to fluctuate much more widely than the underlying assets. This is, of course, an advantage in a rising market.

Who can invest Anyone.

How worthwhile Income shares: Potentially good value for non-taxpayers, 20% taxpayers and basic rate taxpayers but the high and rising income ceases when the trust comes to an end and you may incur a loss of around half your original investment if you don't sell some time before the end of the term. . Capital shares: Potentially good value for higher rate taxpayers but the shares fluctuate a great deal in value.

Minimum Around £1,000 because of minimum commission.

Maximum None but some may be in short supply.

Suitable Lump sums. You can save regularly with some by using Investment Trust Savings Plan.

Money back At the end of the term. 5 days after you sell. Stockbrokers deal every day; managers usually don't. You get the market price when you sell early or a value calculated by the managers if you hold to redemption.

Interest Income shares: Variable. Called dividend. The before tax interest is called the yield. You can expect this to rise year by year. Capital shares: None

Interest paid Usually half-yearly. By cheque to you or direct to a bank account. About 5 weeks before the dividend is paid, the shares go ex-dividend; this means the seller gets the next dividend not the buyer.

Tax 20% rate tax is deducted from the dividend (calledtax credit). Non-taxpayers can reclaim the tax credit from the Inland Revenue. Higher rate taxpayers pay extra, basic taxpayers don't. Gains on trust shares are liable to capital gains tax although there are no tax on gains on ordinary shares bought and sold by the trust.

Fees to pay When you buy and sell: stockbrokers' commission: Varies widely, cheaper from an on-line broker; minimum £10 to £20. Stamp duty ½% when you buy only.

Passbook Share certificate from each investment trust or a statement of ownership from your stockbroker if your shares are held by your stockbroker as nominee. Nominee holdings will increasingly become difficult to avoid under Crest.

Children Unsuitable.

Risk Significantly higher for both Income and Capital shares than Investment Trust Shares.

How to invest Get advice from a specialist stockbroker.

How to invest Visit the Association of Investment Trust Companies web site and Trustnet. They list managers, trust portfolios, speciality, discounts and gearing. Choose from the larger trusts of the type you want with the highest discount and gearing. Or ask a specialist stockbroker for advice, the Association also supplies a list of stockbrokers.

Other types of Investment Trusts
Unit Trusts
Offshore Funds
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Last updated 29 January 2002